JUDGMENT
R (on the application of Derry) (Respondent) v
Commissioners for Her Majesty’s Revenue and
Customs (Appellant)
before
Lord Reed, Deputy President
Lord Carnwath
Lady Black
Lady Arden
Lord Kitchin
JUDGMENT GIVEN ON
10 April 2019
Heard on 12 December 2018
Appellant Respondent
Akash Nawbatt QC Hui Ling McCarthy QC
Aparna Nathan Michael Ripley
(Instructed by HMRC
Solicitor’s Office
(London)
)
(Instructed by Greenwoods
GRM LLP
)
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LORD CARNWATH: (with whom Lord Reed, Lady Black and Lord Kitchin
agree)
Introduction
1. This appeal concerns the correct treatment for income tax purposes of the
respondent’s (Mr Derry’s) claim for share loss relief under section 132 of the Income
Tax Act 2007 (“ITA”).
2. The claimed loss arose in this way. On 22 March 2010 (tax year 2009/10) Mr
Derry bought 500,000 shares, at a cost of £500,000, in a company called Media Pro
Four Ltd. On 4 November 2010 (tax year 2010/11) he sold them to the “Island House
Private Charitable Trust” for £85,500, thereby realising a capital loss of £414,500.
In his return for 2009/10, submitted by his accountants on 24 January 2011, he
claimed share loss relief for that amount against his income for that year under ITA
section 132, with the aim of reducing to that extent his taxable income for that year.
The appellant (“the Revenue”) has identified the claim as a case of possible tax
avoidance, but whether that is so is not an issue presently before us.
3. The appeal raises two questions. The first relates to the effect in law of such
a claim to set the relief against the income for the previous year (“the loss relief
issue”). The second relates to the effect of the inclusion of such a claim (even if
erroneous) within Mr Derry’s return for the previous year, in circumstances where
the Revenue have failed to institute a timeous enquiry into the return under Taxes
Management Act 1970 as amended (“TMA”) section 9A (“the tax return issue”).
The first is an issue of pure statutory interpretation, depending on the interaction of
the certain provisions of the ITA and of the TMA. The second raises issues as to the
correct understanding and effect of Mr Derry’s return, in the light of the law and
practice relating to the self-assessment regime, having regard in particular to the
guidance given by this court in Revenue and Customs Comrs v Cotter [2013] UKSC
69; [2013] 1 WLR 3514 (“Cotter”).
4. The procedural background is as follows. In December 2011, Mr Derry’s
accountants submitted his tax return for 2010/11 online, which (consistently with
the position as stated in his 2009/10 return) said of the loss of £414,500:
“This loss relief has already been claimed and relief obtained
in 2009/10.”
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Nothing turns on the detail of this return.
5. The Revenue responded by three steps:
i) On 4 January 2012, the Revenue gave notice of their intention to open
an enquiry into the claim for share loss relief for 2009/10. This notice was
issued under TMA Schedule lA, on the footing that the claim had been made
“outside of a return” by virtue of paragraph 2(3) of Schedule 1B. That enquiry
remains open. However, if, as Mr Derry submits, Schedule 1B had no
application and the claim was properly made within the return for 2009/10,
then (as is common ground) the enquiry under Schedule 1A had no statutory
basis.
ii) On 16 February 2012, the Revenue gave notice of their intention to
open an enquiry under TMA section 9A into the return for 2010/11. The
accompanying letter indicated that it would be necessary to look at all the
arrangements surrounding the claim, an area of concern being that the
claimed losses might have arisen from “a marketed scheme of arrangements
with the purpose of avoiding tax”. That enquiry also remains open.
iii) On 21 February 2014, the Revenue issued a demand under TMA
section 60 for tax allegedly due for the tax year 2009/10 in the sum of
£166,044.26 with interest. On 6 June 2014, this was replaced by a demand
for £95,546.36 with interest.
6. On 21 May 2014, Mr Derry began the present judicial review proceedings,
which were treated by agreement as relating to the replacement demand of 6 June
2014. He failed on both issues before the Upper Tribunal but succeeded on the
second issue before the Court of Appeal (and therefore succeeded overall). The
Revenue appeal on that issue with the permission of this court; Mr Derry resists the
appeal on that issue but seeks to uphold the decision in any event on Issue 1.
The statutory framework
The Tax Law Rewrite project
7. As noted above, the relevant provisions are contained in the ITA and the
TMA. In considering the interpretation of the ITA it is necessary in my view to have
in mind its genesis as part of the Tax Law Rewrite project. The main purpose of that
project, as stated in the ITA Explanatory Notes (paras 5 and 7) was –
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“… to rewrite the income tax legislation that has not so far been
rewritten so as to make it clearer and easier to use …
The Act does not generally change the meaning of the law
when rewriting it. The minor changes which it does make are
within the remit of the Tax Law Rewrite project and the
Parliamentary process for the Act. In the main, such minor
changes are intended to clarify existing provisions, make them
consistent or bring the law into line with established practice.”
For a useful description and evaluation of the project, see David Salter “The tax law
rewrite in the United Kingdom: plus ç change plus c’est la meme chose?” [2010]
BTR 671.
8. I would also refer to the explanation of the drafting approach for the project,
given by Stephen Timms MP, then Financial Secretary to the Treasury, in 2009 in
the course of opening the Second Reading Committee debate on the second
Corporation Tax Bill:
“The project now has a well-established approach to rewriting
legislation, developed with the help of people whom it has
consulted over a number of years. It restructures legislation to
bring related provisions together and to provide more logical
ordering. It also helps users by providing navigational aids,
such as signposts, to make relevant parts of the legislation
easier to find, and it has introductory provisions to set the
scene. It unpacks dense source legislation by using shorter
sentences and, where possible, it harmonises definitions. It uses
modern language and helps the reader with aids such as
formulae, tables and method statements, when appropriate.”
(Hansard, HC, col 3, Second Reading Committee, Corporation
Tax Bill, 2008-2009 (January 15, 2009) (HC General
Committee Debates, Session 2008-09) cited by David Salter op
cit p 680.)
9. In Eclipse Film Partners (No 35) LLP v Comrs of Her Majesty’s Revenue
and Customs [2013] UKUT 639 (TCC); [2014] STC 1114 Sales J, likened the
correct approach to statutory interpretation to that appropriate to a consolidation
statute (as explained by the House of Lords in Farrell v Alexander [1977] AC 59):
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“When construing a consolidating statute, which is intended to
operate as a coherent code or scheme governing some subject
matter, the principal inference as to the intention of Parliament
is that it should be construed as a single integrated body of law,
without any need for reference back to the same provisions as
they appeared in earlier legislative versions. … An important
part of the objective of a consolidating statute or a project like
the Tax Law Rewrite Project is to gather disparate provisions
into a single, easily accessible code. That objective would be
undermined if, in order to interpret the consolidating
legislation, there was a constant need to refer back to the
previous disparate provisions and construe them …” (para 97)
10. I would respectfully endorse this guidance, which should be read with Lady
Arden’s comments (paras 84-90) on the relevance of prior case law. At the same
time I would emphasise that the task should be approached from the standpoint that
the resulting statutes are intended to be relatively easy to use, not just by
professionals but also by the reasonably informed taxpayer, and that the signposts
are there for a purpose, in particular to give clear pointers to each stage of the
taxpayer’s journey to fiscal enlightenment.
Income Tax Act 2007
11. The ITA clearly reflects these principles (as will be readily apparent from a
comparison with its immediate predecessor, the Income and Corporation Taxes Act
1988 – “ICTA 1988”). It starts in section 2 with an “Overview of the Act”, designed
to give specific guidance as to what follows. Thus, the reader is told that the Act has
17 Parts, the effect of each of which is then summarised with references to the
corresponding chapters. Relevant in the present context are Part 2, which “contains
basic provisions about income tax”, including “(a) provision about the annual nature
of income tax (Chapter 1)” and “(c) the calculation of income tax liability (Chapter
3)”; and Part 4 which “is about loss relief including relief for … (d) losses on
disposal of shares (Chapter 6) …”.
12. In Part 2, section 4 establishes income tax as an annual tax, charged for a tax
year running from 6 April to 5 April in the following year. Chapter 3, headed
“Calculation of Income Tax Liability” provides in section 23 a step-by-step guide
to the process:
“23. The calculation of income tax liability
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To find the liability of a person (‘the taxpayer’) to income tax
for a tax year, take the following steps.
Step 1
Identify the amounts of income on which the taxpayer is
charged to income tax for the tax year. The sum of those
amounts is ‘total income’. Each of those amounts is a
‘component’ of total income.
Step 2
Deduct from the components the amount of any relief under a
provision listed in relation to the taxpayer in section 24 to
which the taxpayer is entitled for the tax year. See sections 24A
and 25 for further provision about the deduction of those
reliefs. The sum of the amounts of the components left after
this step is ‘net income’.
…”
Steps 3 to 7 (not relevant to the present dispute) set out further steps in the
calculation process, leading to the conclusion:
“The result is the taxpayer’s liability to income tax for the tax
year.”
As Henderson LJ noted (para 50) the introduction of the statutory concept of “net
income” under Step 2 was an innovation, bringing about (in his words):
“… a welcome degree of precision and clarity in place of the
previous non-statutory concept of ‘net statutory income’
representing total income less allowable deductions.”
13. In the present case Step 2 would have pointed a taxpayer in Mr Derry’s
position to sections 24 and 25 for guidance on the reliefs there mentioned, including
(under section 24(1)(a)) “Chapter 6 of Part 4 (share loss relief)”. Section 25(2)
would have told him to deduct such reliefs “in the way which will result in the
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greatest reduction” in his tax liability. Moving on, as directed, to Part 4 (“Loss
relief”), he would have found in section 59 an “Overview” of that Part, including a
reference to “losses on a disposal of certain shares (see Chapter 6)” (section
59(1)(d)); and (in case he had forgotten) reminding him that “this Part needs to be
read with Chapter 3 of Part 2 (calculation of income tax liability)” (section 59(2)).
14. Section 131 is the first of a group of sections under Chapter 6, dealing with
“Share loss relief against general income”. An individual is eligible for share loss
relief if he incurs “an allowable loss for capital gains tax purposes” on the disposal
of any “qualifying shares” in “any tax year”, defined as “the year of the loss”.
“Qualifying shares” include shares in a “qualifying trading company”, the
conditions for which are set out in sections 134 to 143.
15. Section 132 provides:
“Entitlement to claim
(1) An individual who is eligible for share loss relief may
make a claim for the loss to be deducted in calculating the
individual’s net income –
(a) for the year of the loss,
(b) for the previous tax year, or
(c) for both tax years.
(See Step 2 of the calculation in section 23.)
(2) If the claim is made in relation to both tax years, the
claim must specify the year for which a deduction is to be made
first.
(3) Otherwise the claim must specify either the year of the
loss or the previous tax year.
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(4) The claim must be made on or before the first
anniversary of the normal self-assessment filing date for the
year of the loss.”
Notable here again is the specific reference back to Step 2 in the calculation of
liability under section 23.
16. Section 133 (headed “How the relief works”) provides:
“(1) This subsection explains how the deductions are to be
made.
…
Step 1 Deduct the loss in calculating the individual’s net
income for the specified tax year …”
The reference to “net income” again takes the reader back to section 23 where that
concept is defined.
17. At this point, in relation to the first issue, I note Ms McCarthy QC’s
submission, for Mr Derry, that the provisions of the ITA so far considered give clear
and conclusive guidance as to the treatment of his claim to share loss relief for the
purposes of assessing his liability for the tax year 2009/10, which is not overridden
by anything elsewhere in the ITA or in the TMA.
18. On the other side, for the Revenue Mr Nawbatt QC submits that this is only
part of the story. He refers to ITA section 1020(2) which, as he says, would have
pointed the taxpayer in the direction of TMA in these terms:
“For further information about claims and elections, see TMA
1970 (in particular section 42(2), (10) and (11) and Schedule
1A).”
Although there is no specific reference to TMA Schedule 1B, that as he submits is
to be taken as encompassed in the general reference to the TMA itself.
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19. He also relies by way of analogy on more specific references to the TMA in
other chapters of Part 4. They are in Chapter 2 (“Trade losses”) and Chapter 5
(“Employment loss relief”). The legislative pattern in each case is very similar to
the provisions relating to share loss relief, but in each case, there appear
(respectively in section 60(2) and section 128(7)) the following words:
“This Chapter is subject to paragraph 2 of Schedule 1B to TMA
1970 (claims for loss relief involving two or more years).”
There is no equivalent reservation in the sections relating to share loss relief.
However, Mr Nawbatt submits that the analogy indicates the appropriate
relationship between the loss relief provisions and the TMA; and that, even without
such a specific reference, section 1020 is sufficient to point the taxpayer in that
direction; or alternatively that the terms of Schedule 1B are sufficiently clear in
themselves to make such a signpost unnecessary.
TMA
20. The TMA, as its title implies, is concerned principally with the management
of the tax rather than fixing liability. Although it dates back to 1970, it has been
subject to substantial amendment since then, in particular in connection with the
introduction of self-assessment (under the Finance Act 1994) with effect from the
year 1996-1997. The following provisions are those in force in the relevant tax year,
that is 2009/10.
21. I refer first to those relating to tax returns and self-assessment, which are
relevant principally to the second issue. Section 8(1) empowers an officer of HMRC
to give a notice requiring a person chargeable to income tax and capital gains tax for
a year of assessment to make and deliver, on or before the date specified in
subsection (1A), a return containing the information required by the notice,
supported by such accounts and other relevant material as may reasonably be so
required. The date so specified (for present purposes) is 31 January next following
the year of assessment. By subsection (1AA)(a):
“the amounts in which a person is chargeable to income tax and
capital gains tax are net amounts, that is to say, amounts which
take into account any relief or allowance a claim for which is
included in the return;”
By subsection (1AA)(b) the “amount payable” by way of income tax is the
difference between the chargeable amount and the aggregate amount of any income
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tax deducted at source and certain tax credits. Subsection (1H) requires the
Commissioners to “prescribe what constitutes an electronic return”. (See also
section 113 which provides generally for “any returns” to be in “such form as the
Board prescribe”.)
22. Section 9(1) provides that, subject to immaterial exceptions, every return
under section 8:
“… shall include a self-assessment, that is to say –
(a) an assessment of the amounts in which, on the
basis of the information contained in the return and
taking into account any relief or allowance a claim for
which is included in the return, the person making the
return is chargeable to income tax and capital gains tax
for the year of assessment; and
(b) an assessment of the amount payable by him by
way of income tax …”
Section 9A enables an officer of the Board to give notice of his intention to enquire
into a return under section 8 within the time allowed, that is 12 months from the date
of delivery for returns delivered on or before the date specified in the previous
section. By subsection (4)(a), an enquiry may extend to anything contained (or
required to be contained) in the return, “including any claim … included in the
return”.
23. Returning to the first (loss relief) issue, section 42 (headed “Procedure for
making claims etc”) provides:
“(1) Where any provision of the Taxes Acts provides for
relief to be given, or any other thing to be done, on the making
of a claim, this section shall, unless otherwise provided, have
effect in relation to the claim.
…
(2) … where notice has been given under section 8 … of
this Act, a claim shall not at any time be made otherwise than
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by being included in a return under that section if it could, at
that or any subsequent time, be made by being so included.
…
(11) Schedule 1A to this Act shall apply as respects any
claim or election which –
(a) is made otherwise than by being included in a
return under section 8 … of this Act, …
(11A) Schedule 1B to this Act shall have effect as respects
certain claims for relief involving two or more years of
assessment.
…”
24. Thus subsections (11) and (11A) take the reader on to Schedules 1A and 1B.
The latter is most directly relevant to the first issue. Schedule 1A (headed “Claims
etc not included in returns”) provides for any such claim to be made “in such form
as the Board may determine” (paragraph 2(3)), and provides power to enquire into
the claim within a specified period (paragraph 5). The Board is required to give
effect to a claim as soon as practicable “by discharge or repayment of tax”
(paragraph 4(1)), save that, if an enquiry has been opened into the claim, this
obligation is postponed until the enquiry is completed, subject to power before then
to give effect to all or part of the claim on a provisional basis (paragraph 4(3)).
25. Schedule 1B (headed “Claims for relief involving two or more years”)
provides in paragraph 2 (headed “Loss relief”):
“(1) This paragraph applies where a person makes a claim
requiring relief for a loss incurred or treated as incurred, or a
payment made, in one year of assessment (‘the later year’) to
be given in an earlier year of assessment (‘the earlier year’).
(2) Section 42(2) of this Act shall not apply in relation to
the claim.
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(3) The claim shall relate to the later year.
(4) Subject to sub-paragraph (5) below, the claim shall be
for an amount equal to the difference between –
(a) the amount in which the person is chargeable to
tax for the earlier year (‘amount A’); and
(b) the amount in which he would be so chargeable
on the assumption that effect could be, and were, given
to the claim in relation to that year (‘amount B’).
…
(6) Effect shall be given to the claim in relation to the later
year, whether by repayment or set-off, … or otherwise.”
The loss-relief issue
26. The issue in short is whether, having exercised his right (under section 132)
to claim the relevant loss relief in the previous year (2009/10), Mr Derry was correct
to deduct that loss in calculating his net income and consequent tax liability for that
year (under section 23); or whether, as the Revenue contend, that right was in effect
overridden by TMA Schedule 1B, with the result that the loss, though claimed in
year 2009/10, was to be treated as “relating to” the following year.
The decisions below
27. Both the Upper Tribunal and Court of Appeal decided this issue in favour of
the Revenue. It is not possible to do justice to their reasoning without relatively full
reference to the leading judgment of Henderson LJ in the Court of Appeal (agreed
by the other members of the court), which in turn refers with general approval to
that of Morgan J in the Upper Tribunal. It also provides a useful summary of the
respective contentions of the parties, which have been substantially repeated in this
court.
28. Having set out the relevant provisions of the TMA, Henderson LJ observed
(paras 26-28) that the terms of paragraph 2 of Schedule 1B, read in isolation, were
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apt to apply to a claim for loss relief under section 131, and as such would have the
same consequences as explained (in respect of employment loss relief) by Lord
Hodge in Cotter. He identified the “critical issue” as being –
“… whether the omission from Chapter 6 of a provision
equivalent to section 60(2) or section 128(7) reflects a
legislative intention that Schedule 1B should not apply to
Chapter 6, even though (as I have already pointed out) the
language of paragraph 2 of Schedule 1B would be entirely apt
to apply to Chapter 6 in the same way as it applies to Chapters
2 and 5.” (para 35)
29. He recorded (paras 37ff) that Morgan J had begun by observing that TMA
section 42 applied “unless otherwise provided” and asking whether there was
anything to disapply the section in respect of Mr Derry’s claim under section 132.
He had answered that question in the negative, noting also that neither side had put
forward “any persuasive reason” for the difference of treatment between claims
under Chapters 2 and 5 as compared to Chapter 6. He had described the specific
references in the former to Schedule 1B as “signposts”; but he did not regard the
lack of a similar signpost in Chapter 6 as clear enough to be “otherwise provided”
for the purposes of section 42(1). He had also concluded that there was no
inconsistency between the “detailed provisions of sections 132 and 133 of ITA 2007,
taken together with the operation of section 23” and paragraph 2 of Schedule 1B.
Henderson LJ regarded this observation as “clearly correct”, adding that it “(was)
not challenged by Mr Derry”. (The latter understanding appears to have been
mistaken, having regard to an extract we were shown by Ms McCarthy from Mr
Derry’s Replacement Skeleton Argument in the Court of Appeal.)
30. Morgan J had also considered and rejected an argument for Mr Derry based
on the reference in section 42(11A) to its application only to “certain claims”. Again,
Henderson LJ agreed commenting:
“The structure of Schedule 1B is that it applies to certain
specified claims for relief involving two or more years. The
provisions relating to loss relief are contained in paragraph 2.
The remaining paragraphs deal with entirely separate claims,
for example relief for fluctuating profits of farming etc in
paragraph 3, and the carry-back of post-cessation receipts in
paragraph 5. It is therefore entirely natural for the provision in
the body of TMA 1970 which gives effect to Schedule 1B to
say that it ‘shall have effect as respects certain claims for relief
involving two or more years of assessment’, that is to say the
various claims for relief which are dealt with in the Schedule.
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Much clearer language would in my judgment have been
needed if Parliament had intended to stipulate that the
provisions contained in Schedule 1B were to apply only to
claims expressly identified elsewhere in the Taxes Acts as ones
to which Schedule 1B applied. Another way of making the
same point is to say that the subject matter of Schedule 1B is to
be ascertained by looking at its provisions, which are given
effect (but not circumscribed) by section 42(11A).” (para 42)
31. Turning to the submissions in the Court of Appeal, he noted Ms McCarthy’s
reliance on Lord Dunedin’s well-known enumeration of the “three stages in the
imposition of a tax” – that is, declaration of liability, assessment, and methods of
recovery (Whitney v Inland Revenue Comrs [1926] AC 37, 52). The first (in Lord
Dunedin’s words) was –
“… the part of the statute which determines what persons in
respect of what property are liable. … Liability does not depend
on assessment. That, ex hypothesi, has already been fixed.”
She submitted that Mr Derry’s liability was fixed by the provisions of Chapter 6 and
could not be overridden by provisions relating to the assessment stage, other than
by clear words as found in Chapters 2 and 5 of ITA Part 4.
32. Henderson LJ disagreed (para 49). Lord Dunedin’s classic statement was of
little assistance in respect of the present UK tax system which is “vastly more
complex than it was a century ago”:
“one cannot always expect today to find that provisions relating
to the imposition and calculation of liability are unaffected by
provisions relating to the machinery of assessment.”
The language of Schedule 1B paragraph 2 was clearly apt to cover Mr Derry’s claim,
and the absence of “an express signpost” in Chapter 6 was not a sufficiently strong
counter-indication. He also rejected (para 50) an argument that sections 132-133
constituted a more specific statutory regime, enacted later than Schedule 1B, and
should therefore take precedence.
33. Finally, he agreed with the Upper Tribunal that there was nothing in the
legislative history which cast useful light on the question (paras 51-52). He noted
Ms McCarthy’s submission that the inclusion of signposts in respect of trade loss
relief and employment loss relief may have been connected with the treatment of the
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predecessor provision (section 380 of ICTA 1988) by the Court of Appeal in
Blackburn v Keeling [2003] EWCA Civ 1221. But the reason for the absence in
sections 132-133 of a similar cross-reference remained obscure; “the possibility that
it was simply an oversight certainly cannot be excluded”.
Comment on Issue 1
34. With respect to the carefully developed reasoning of the judges below, they
seem to me not only to have paid too little regard to the legislative purpose and
scheme of the ITA, but also to have started from the wrong point. It is notable that
the introductory paragraphs of Henderson LJ’s judgment make only passing
reference to the opening sections of the ITA discussed above, and in particular to
section 23, by which (on its face) Mr Derry’s liability for the relevant tax year
2009/10 was fixed. Instead, his reasoning on this part of the case starts from the
proposition that the words of TMA Schedule 1B paragraph 2 “read in isolation” are
apt to cover Mr Derry’s claim, and only then refers to the governing provisions of
the ITA, asking whether the omission of a specific signpost in ITA Chapter 6 reflects
a “legislative intention” that it should not apply (paras 26, 35).
35. While it may be true, as Henderson LJ said, that modern tax legislation in
general is much more complex than at the time of Lord Dunedin’s classic statement,
the purpose of the tax law rewrite was to restore a measure of simplicity and
coherence to the principal tax statutes. In any event, one does not need high judicial
authority to make the obvious point that the first step in the imposition of a tax is to
establish (in Lord Dunedin’s words) “what persons in respect of what property are
liable”. Taken together section 23 and sections 131-132 appear to constitute a clear
and self-contained code for the treatment of a claim to share-loss relief such as that
of Mr Derry. Sections 132-133 in terms give him an “entitlement” to make the claim,
to specify the tax year to which it is to be applied, and to do so by deducting it in the
calculation of his “net income” for the purpose of section 23. For good measure
section 132(1) provides a specific signpost to Step 2 in section 23. That section in
turn makes clear that the “result” of that, and the other steps there set out, is his “tax
liability” for the tax year in question.
36. Having taken such care to walk the taxpayer through the process of giving
effect to his entitlement as part of his tax liability for the year specified by him, it
would seem extraordinary for that to be taken away, without any direct reference or
signpost, by a provision in a relatively obscure Schedule of another statute
concerned principally, not with liability, but with management of the tax. Section
1020 makes no specific reference to Schedule 1B, and in any event refers only to
“information” in general terms, rather than anything likely to affect the substance of
liability. By contrast sections 60(2) and 128(7) are more than mere “signposts”, as
the judges below characterised them. The words “subject to” are substantive in
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effect, imposing a qualification on the right otherwise conferred by those provisions.
Applying ordinary principles of interpretation, the absence of similar words in
section 132 would naturally be taken as indicating that this right is not subject to the
same qualification.
37. Turning to the TMA, it is true that words of Schedule 1B taken on their own
would be apt to apply to a claim under sections 132-133. However, I do not regard
that as enough to displace the clear provisions of the ITA in respect of liability. I do
not see this as turning so much on whether one set of provisions is more specific
than the other, but rather on the fact that the ITA is in principle the governing statute
in respect of tax liability, and as such should take precedence in the absence of any
indication to the contrary. Further, unlike the judges below, I see a significant
inconsistency between the two sets of provisions: the first gives the taxpayer an
unqualified right to claim a deduction in the previous year; the second in effect
removes that right by treating it as relating to the current year. I also see force in Ms
McCarthy’s reliance on the reference in section 42(11A) to “certain claims” for
relief involving two or more years. As she says, this may be read as implying that
not all such claims are covered, and that one needs to look elsewhere to identify
which. (I do not forget that in Cotter para 14, Lord Hodge proceeded on the basis
that section 42(11A) had the “same” effect in respect of employment loss relief as
the specific provision in section 128(7), but the point was not in issue and does not
seem to have been subject to argument.)
38. The only countervailing consideration, to my mind, is the lack of any obvious
explanation, in the statutory history or otherwise, of the different treatment of this
form of loss relief. In a post-hearing note Mr Nawbatt gave a detailed account of the
treatment of the various forms of loss relief under the previous legislation. This
shows, as is common ground, that the pre-2007 law did not draw any material
distinction between share loss relief (section 574 ICTA 1988), and trade and
employment loss relief (section 380 ICTA 1988). Mr Nawbatt was also able to point
to some indications in the ITA Explanatory Notes (eg in respect of section 1025,
which is not directly relevant to the present case) that the authors of the notes may
have assumed that share loss relief would be subject to TMA Schedule 1B, in the
same way as the other forms of relief. However, taken at their highest, these
indications are far from providing a basis for departing from the ordinary principles
of statutory interpretation, absent any suggestion that they produce a result which is
absurd or unworkable. Indeed, for the taxpayer’s liability to be determined by
reference to legal archaeology of this kind would negate the whole purpose of the
tax law rewrite. It is neither necessary nor appropriate for the court to speculate as
to Parliament’s intentions to justify a departure from the natural interpretation of the
statutory language.
Page 17
39. For these reasons, in respectful disagreement with the Upper Tribunal and
the Court of Appeal, I would hold that Mr Derry was entitled to make his claim to
share loss relief in the year 2009/10.
The tax return issue
40. The view I have reached on the first issue makes it strictly unnecessary to
reach a conclusion on the second issue. So much was conceded by Mr Nawbatt for
the Revenue in response to a question from the court early in the hearing but see
para 65 below. Consistently with that concession, if (as I have decided) Mr Derry
succeeds on Issue 1, then the claim properly formed part of Mr Derry’s return for
the year 2009/10, and that it could only be challenged by a notice served within time
under TMA section 9A. However, the second issue is of some difficulty and of
general importance. It may be helpful therefore for us to express some views on the
respective submissions. This issue has to be approached on the assumption that Mr
Derry was wrong on the first issue, and that the inclusion of the loss relief claim in
the assessment of his liability for 2009/10 was in error.
41. Before further considering this issue, it is necessary to refer in more detail to
the factual background.
The sequence of events
42. On 24 January 2011 Mr Derry’s accountants filed his 2009/10 selfassessment tax return (“the 2010 return”). The Additional Information pages (Ai3
and Ai4) were completed as follows. In Boxes 3 and 4 (headed “Trading Losses”)
he put £414,500.00 as the amount for which he was claiming relief, and 2009/10 as
the tax year for which it was claimed. Box 19 (which was a blank space for
additional information) contained the following entry:
“Box 3 of page Ai3 shows capital losses realised on disposal of
subscriber shares in an unlisted trading company in year ended
5 April 2011. These losses have been carried back to year
ended 5 April 2010 and relief claimed under section 131,
section 132 ITA 2007.”
43. He also calculated his own tax and completed the tax calculation summary
pages (pages TC1 and 2) in the 2009-10 return as follows. On page TCl (headed
“self-assessment”), in Box 1 (“total tax … due before any payments on account”),
the figure of £95,546.36 appeared automatically as a result of entries made
elsewhere on the form. Page TC2 (headed “adjustments to tax due”) stated –
Page 18
“You may need to make an adjustment to increase or decrease
your tax for 2009-10 because you are … carrying back to 2009-
10 certain losses from 2010-11 …”
In Box 15 (“Any 2010/11 repayment you are claiming now”) Mr Derry inserted the
figure of £165,800; and in Box 16 (“Any other information”) the words:
“The reduction in tax payable in Box 15 of page TC2 relates to
the loss carry back claim arising from the carry back of losses
of GBP 414,500 as set out on page Ai3. The corresponding
reduction in tax payable in the year ended 5 April 2010
following this loss carry back claim is GBP 165, 800 being
GBP 414,500 at 40%.”
44. Mr Derry had already suffered tax deducted at source of £102,233.64 on his
income for 2009/10 (made up principally of employment income of £497,120).
What followed was described by Henderson LJ:
“10. … the effect of his claim for loss relief carried back from
2010/11 was to generate a significant repayment of tax due to
him. This was quantified in his personal tax computation,
generated by the 2010 Return, as a refund due to him of
£70,253.64.
11. On 18 October 2011, HMRC repaid a sum of
£70,487.90 to Mr Derry. It is unclear why HMRC refunded this
slightly higher amount, but the payment was clearly intended
to include the amount claimed by Mr Derry, albeit HMRC now
say that the payment was made in error because full checks had
yet to be completed in relation to the loss relief claim.”
45. The legal effect of these entries is a matter of dispute. In the first place the
Revenue do not accept that the personal tax computation is properly to be
characterised as “generated by the 2010 Return” (in Henderson LJ’s words). They
accept that Mr Derry self-assessed his own tax liability for 2009/10, but their
position is that his self-assessed liability was in the sum of (plus) £95,546.36, given
in Box 1 on page TC1, not the figure after taking account of loss relief. The reference
to the loss relief claim was to be treated as additional information in respect of a
“free-standing credit” or “FSC” (a non-statutory term: see Upper Tribunal para 61),
but not as directly relevant to his liability for the year 2009/10.
Page 19
The judgments below
46. On this issue there was a difference between the Upper Tribunal and the
Court of Appeal. Morgan J agreed with the Revenue’s interpretation:
“I consider that the tax return should be construed against the
background of the relevant legal provisions. Under Chapter 6
of Part 4 of ITA, Mr Derry is able to make a claim in relation
to such capital losses against the income in the year 2010-2011
and also the year 2009-2010 but such a claim relates to the year
2010-2011 and does not reduce the tax payable for the year
2009-2010. Against that background, I consider that the
presence of the claim for capital losses does not displace the
clear assessment to tax in the sum of £95,546.36.” (UT para 52)
47. Henderson LJ disagreed with this reasoning (CA para 60). It failed to
recognise the distinction between “the claim itself, which … could only be given
effect in 2010/11, and the self-assessment which Mr Derry performed, albeit on an
erroneous basis, for 2009/10”; and also failed to give effect to the adjustment made
and explained in Boxes 15 and 16 on page TC2. Further it was inconsistent with
parts of Lord Hodge’s reasoning in Cotter. He also rejected as “an impossible
contention” the submission for HMRC that the entry in Box 15 should not be
construed as forming part of the calculation of liability to tax for 2009/10:
“The purpose of the tax calculation is to calculate the tax due
for the year of assessment. The rubric above boxes 13 to 15
refers to the need to make ‘an adjustment to increase or
decrease your tax for 2009-10’, because of claims (inter alia)
to carry back to 2009/10 certain losses from 2010/11. In this
context, although the wording of Box 15 itself (‘Any 2010-11
repayment you are claiming now’) is on any view rather
imprecise, it can only sensibly be understood as referring to a
carry back of losses from 2010/11 in reduction of the tax
actually due for 2009/10. This is what Mr Derry purported to
do, and this was the basis on which he calculated the repayment
of tax due to him …” (para 63)
Cotter
48. At this stage it is necessary to refer in more detail to the leading judgment of
Lord Hodge in Cotter itself. Mr Cotter had claimed to carry back to the previous
Page 20
year (2007/08) loss relief allegedly sustained in 2008/09. He had originally
submitted his return for 2007/08 without a claim for loss relief and had left it to the
Revenue to calculate the tax due. That had led to a calculation of his tax liability for
the year based on the return as it then stood. He later entered into a tax avoidance
scheme intended to eliminate that liability, for which purpose his accountants
submitted a provisional 2007/08 loss relief claim and proposed amendments to his
2007/08 self-assessment form relying on his loss relief claim. The Revenue opened
an enquiry into the claim under Schedule 1A, and in the meantime refused to give
effect to the claim. In due course they instituted county court proceedings for the tax
due.
49. In his defence Mr Cotter challenged the jurisdiction of the court, on the
grounds that he had made an effective claim for relief in his tax return for 2007/08
which could only be challenged by an enquiry under section 9A, and in relation to
which the First-tier Tribunal had exclusive jurisdiction. The proceedings were
transferred on this issue to the Chancery Division of the High Court, which rejected
his defence. Although his appeal to the Court of Appeal was successful, their
decision was reversed by the Supreme Court (the single judgment being given by
Lord Hodge).
50. It was held that by virtue of Schedule 1B his claim, though referred to in his
amended 2007/08 tax return, must be treated as relating to the following tax year,
and not therefore as part of the “return” in the relevant sense, that being limited to
the information required to establish his liability for the year in question. More
directly relevant to the present case, however, is a passage in Lord Hodge’s
judgment commenting (obiter) on the position if Mr Cotter had made the calculation
of liability himself, rather than leaving it to HMRC to do so.
51. In order to set this passage in the context of Lord Hodge’s discussion of the
interaction of the relevant provisions and the tax return form, it is appropriate to
quote the relevant paragraphs in full:
“24. Where, as in this case, the taxpayer has included
information in his tax return but has left it to the revenue to
calculate the tax which he is due to pay, I think that the revenue
is entitled to treat as irrelevant to that calculation information
and claims, which clearly do not as a matter of law affect the
tax chargeable and payable in the relevant year of assessment.
It is clear from section 8(1) and 8(1AA) of the 1970 Act … that
the purpose of a tax return is to establish the amounts of income
tax and capital gains tax chargeable for a year of assessment
and the amount of income tax payable for that year. The
revenue’s calculation of the tax due is made on behalf of the
Page 21
taxpayer and is treated as the taxpayer’s self-assessment:
section 9(3)(3A) of the 1970 Act …
25. The tax return form contains other requests, such as
information about student loan repayments (page TR2), the
transfer of the unused part of a taxpayer’s blind person’s
allowance (page TR3) or claims for losses in the following tax
year (Box 3 on page Ai3) which do not affect the income tax
chargeable in the tax year which the return form addresses. The
word ‘return’ may have a wider meaning in other contexts
within the 1970 Act. But, in my view, in the context of sections
8(1), 9, 9A and 42(11)(a) of the 1970 Act, a ‘return’ refers to
the information in the tax return form which is submitted for
‘the purpose of establishing the amounts in which a person is
chargeable to income tax and capital gains tax’ for the relevant
year of assessment and ‘the amount payable by him by way of
income tax for that year’: section 8(1) [of] the 1970 Act, as
substituted firstly by section 178(1) of the Finance Act 1994
and then further amended by section 121(1) of the Finance Act
1996 and by section 114 of and Schedule 27 to the Finance Act
2007.
26. In this case, the figures in Box 14 on page CG1 and in
Box 3 on page Ai3 were supplemented by the explanations
which Mr Cotter gave of his claim in the boxes requesting ‘any
other information’ and ‘additional information’ in the tax
return. Those explanations alerted the revenue to the nature of
the claim for relief. It concluded, correctly, that the claim under
section 128 of the 2007 Act in respect of losses incurred in
2008/2009 did not alter the tax chargeable or payable in
relation to 2007/2008. The revenue was accordingly entitled
and indeed obliged to use Schedule 1A of the 1970 Act as the
vehicle for its enquiry into the claim: section 42(11)(a).
27. Matters would have been different if the taxpayer had
calculated his liability to income and capital gains tax by
requesting and completing the tax calculation summary pages
of the tax return. In such circumstances the revenue would have
his assessment that, as a result of the claim, specific sums or no
sums were due as the tax chargeable and payable for
2007/2008. Such information and self-assessment would in my
view fall within a ‘return’ under section 9A of the 1970 Act as
it would be the taxpayer’s assessment of his liability in respect
of the relevant tax year. The revenue could not go behind the
Page 22
taxpayer’s self-assessment without either amending the tax
return (section 9ZB of the 1970 Act …) or instituting an
enquiry under section 9A of the 1970 Act.
28. It follows that a taxpayer may be able to delay the
payment of tax by claims which turn out to be unfounded if he
completes the assessment by calculating the tax which he is due
to pay. Accordingly, the revenue’s interpretation of the
expression ‘return’ may not save it from tax avoidance
schemes. But what persuades me that the revenue is right in its
interpretation of ‘return’ is that income tax is an annual tax and
that disputes about matters which are not relevant to a
taxpayer’s liability in a particular year should not postpone the
finality of that year’s assessment.”
52. While recognising that the last two paragraphs were not binding, Henderson
LJ regarded them as following logically from Lord Hodge’s earlier analysis. He saw
a clear distinction between the inclusion in the return of information which is
irrelevant in law to the taxpayer’s liability for that year (even if included by implicit
invitation of the Revenue), and the taxpayer’s self-assessment of the tax which he is
due to pay:
“… a taxpayer’s self-assessment is a different matter. Plainly,
errors of many different kinds may be made in such an
assessment, and they may include errors about the availability
of a relief. If the Revenue is dissatisfied with the taxpayer’s
self-assessment, its remedy is either to amend the return or to
open an enquiry into it under section 9A of TMA 1970. …,
such an enquiry may extend to anything contained (or required
to be contained) in the return. The boxes on page TC2 for
‘adjustments to tax due’ must in my view be regarded as
containing information required to be contained in the return,
where the taxpayer elects to perform his own self-assessment,
because such adjustments form an integral part of the
calculation of the tax due to be paid by him for the year in
accordance with sections 23 and 24 of ITA 2007. It follows that
the information contained in those boxes cannot be regarded as
extraneous to the return. As I understand it, this is the essential
point which Lord Hodge was making in Cotter at para 27, and
if I may respectfully say so, I agree with it.” (para 57)
Page 23
The Revenue’s difficulty in the present case arose simply from their failure to take
“the obvious step” of opening an enquiry into the 2010 return within the statutory
time limit.
The submissions in the appeal
53. Ms McCarthy generally supported the reasoning of the Court of Appeal on
this issue, and relied in particular on Lord Hodge’s observations in paras 27-28 as
directly applicable to Mr Derry’s claim.
54. For the Revenue, Mr Nawbatt submitted that the obiter observations in Cotter
cannot be taken as suggesting that “reliefs may be forced into year 1 where they do
not in law relate to year 1”. Lord Hodge’s observations should not be taken as
intended to create a situation where a taxpayer can “erroneously (or perhaps
deliberately)” make a claim as part of his self-assessment exercise and expect to
benefit from the error unless noticed and acted upon by the Revenue. The Court of
Appeal’s reasoning in the present case, he submitted, turned on a misunderstanding
of the correct meaning of self-assessment, which relates solely to the action required
to establish the amounts in which a person is chargeable to tax for the year, as
reflected in the “total tax” figure given in the self-assessment Box. It is wrong to
regard other parts of the Tax Calculation Summary pages as part of that exercise if,
as explained in Cotter (para 25) they do not affect the assessment of income tax
chargeable for the year.
Mr Dean’s evidence
55. At this point I should refer to the witness statement of Mr Graham Dean, a
Senior Investigator with the Revenue, which was admitted before the Upper
Tribunal and referred to by Morgan J on other matters (see UT paras 47, 59ff).
56. Mr Dean’s evidence was not mentioned by the Court of Appeal. Nor was it
included in the original papers for this court or referred to in the written submissions;
it was only produced at the request of the court. He speaks with experience as an
Inspector of Taxes for more than 25 years, and particular experience of leading
investigations into share loss relief avoidance.
57. Mr Dean explains the procedures governing the submission of tax returns
online, by use either of the Revenue’s own software, or software provided by other
suppliers complying with the Revenue’s technical specifications and designed to
produce the same computations (paras 5-6). He comments on the significance of
different parts of the return:
Page 24
“As well as the mandatory information relating to income and
gains and the self-assessment for the year in question (as
required under sections 8 and 9), the tax return also provides
spaces to allow the taxpayer, if he wishes, to provide other
information or to make claims not related to the year in
question. These are provided for administrative convenience
and customer service but, being optional, are not subject to the
consistency checks described above.
One such matter is the ability to submit an early claim to relieve
trading or capital losses arising in the immediately following
tax year (‘year 2’) by reference to income for the current year
(‘year 1’) or an earlier year. If the taxpayer wishes to make such
a claim effective, he would also need to compute the amount of
the tax repayment that he considers will arise from the claim
and enter this in the box labelled ‘Any [year 2] payment you
are reclaiming now’ within the section headed ‘adjustments to
tax due’. As these claims are not part of the year 1 return and
do not affect the self-assessment for that year, they are
frequently referred to as ‘stand-alone claims’.” (paras 12-13)
He explains that such a year 2 repayment claim is shown on the taxpayer’s “selfassessment statement of account” as a “Free Standing Credit” or “FSC”. This, he
says, “simply records what the taxpayer has claimed. It does not represent HMRC’s
approval of the claim”. Referring to Box 15 on page TC2, he says “that is not part
of the return, so it is not subject to any of the automated tax consistency checks …”
(para 16).
58. Commenting on Mr Derry’s own return, and the entry in Box 15, he says that
the effect of entering the figure of £165,800 in this box was “to automatically
generate an FSC of the same amount …”; and that, when it was set against the
balancing payment of £95,546.36 due on 31 January 2011, the “computer
automatically allocated the FSC against that liability first” showing the balance as a
“repayment pending” of £70,253.64 (paras 25, 28). Although he has been unable to
ascertain the precise circumstances of the repayment made to Mr Derry before the
conclusion of the enquiry, his own view, given the size of the claim and the fact that
the company in question had not been identified, was that it had been made “if not
in error, then prematurely” (para 31). Finally, he mentions the “operational
problems” caused for the Revenue by the Court of Appeal’s decision in Cotter. But
notes without further comment that the Revenue’s appeal was allowed by the
Supreme Court. It does not appear that any similar evidence was before the court in
Cotter.
Page 25
59. There was some uncertainty at the end of the hearing about the precise status
of Mr Dean’s evidence, or the extent to which it was relied on in support of the
Revenue’s submissions. Although we invited further submissions on certain
questions apparently arising from it, I do not think the evidence itself is critical to
our consideration of this issue. It is of some interest in explaining, not only the
background to the present appeal, but more generally aspects of the Revenue’s
approach to the self-assessment process, and the workings of its internal systems.
However, as Ms McCarthy rightly submits, neither the Revenue’s internal
management systems, nor Mr Dean’s subjective understanding of them, can
ultimately be determinative of the issue before us. That must turn on the correct
interpretation of the law, and an objective reading of the tax return within its
statutory framework.
60. It may be, as Lady Arden suggests, that the relevant statutory framework
should be taken as including the terms in which the relevant return forms, paper or
electronic, are prescribed by the Revenue (under sections 8(1H) and 113 of the 1970
Act). That may in turn raise a question whether, in respect of the on-line forms, those
prescribed terms include, or are to be taken as including, the automatic adjustments
built into the Revenue’s software, including the calculation in Box 1. Mr Dean’s
evidence provides no direct assistance on the point, and neither party based any
submissions on it. On the limited material before us, it is difficult to draw any firm
conclusions.
Post-hearing submissions on Cotter
61. One point on which we asked for clarification was the Revenue’s position on
Lord Hodge’s obiter comments in Cotter, and in particular whether it mattered that
the return in that case was in paper form rather than on-line as in the present case. I
quote Mr Nawbatt’s response:
“The material difference between submitting a paper return
(including the tax calculation pages) and an on-line return is
that because the tax calculation pages on the paper return are
completed manually it is physically possible for the taxpayer to
enter into Box 1 TC1 a figure that is not the sum of the relevant
boxes that feed into the self-assessment for the year. As
explained in Rouse 2 [R (Rouse) v HMRC [2014] STC 230], at
para 14, if HMRC wanted to enquire into that Box 1 figure it
would have to open a section 9A enquiry …
Mr Cotter’s case involved a paper return and had he requested
the tax calculation pages he would have completed the Box 1
Page 26
TC1 calculation manually rather than leaving it to HMRC to
carry out the calculation. It is HMRC’s position that Lord
Hodge’s obiter comments in para 27 were addressing a
hypothetical scenario in which Mr Cotter’s manual calculation
of the Box 1 figure had involved the deduction of the year 2
loss relief, ie the figure Mr Cotter had manually inserted into
Box 1 had been arrived at after deducting the year 2 relief …”
62. This interpretation, he submitted, is supported by Lord Hodge’s reference to
Mr Cotter having “calculated his liability” to income tax by completing the tax
calculation summary pages, giving the Revenue his assessment that “specific sums
or no sums were due as the tax chargeable …” for that year. The equivalent pages
of the on-line form used by Mr Derry did not permit such a specific calculation. To
establish his claim he would have needed to complete the capital gains pages on the
year 1 return, which it is said would have “fed into” the figure in Box 1.
63. Ms McCarthy rejected this narrow view of Lord Hodge’s comments, and also
the Revenue’s attempt to distinguish between the different parts of the Tax
Calculation Summary. As she points out, Box 1 includes a reference to “student loan
repayment”, which as Lord Hodge accepted (para 25) is extraneous to the chargeable
income tax of the year. On the other hand, the Revenue accept that some other parts
of the summary (Boxes 11 and 12: “Blind person’s surplus allowance and married
couple’s surplus allowance”) do “feed into” the tax for the current year. As Ms
McCarthy submits, it is impossible to draw any clear distinction based simply on the
printed entries in the form itself. She rejects as “absurd” the novel suggestion that,
in order to claim a relief relevant to his income tax liability, he should have to fill in
a part of the return dealing with capital gains.
Comment on Issue 2
64. Ms McCarthy’s submission, like the Court of Appeal’s reasoning, appears
consistent with the natural reading of the statutory provisions. Section 9 requires the
taxpayer to make a self-assessment of the chargeable amount of tax “on the basis of
the information contained in the return and taking into account any relief … a claim
for which is included in the return” (emphasis added). On its face, this implies that
the return is treated as including the relief as claimed by the taxpayer in his return,
whether or not the claim ultimately proves well-founded. The Revenue’s case rests
on the assertion that the process of “self-assessment” is defined by the figure which
appears in Box 1 under that title, and that other “claims”, including in particular in
Box 15, are irrelevant in so far as they “do not feed into” the self-assessment for the
current year.
Page 27
65. Although, as already noted (para 40 above), Mr Nawbatt had conceded that
this issue would not arise if Mr Derry succeeded on the first issue, his post-hearing
submission appeared to go back on that. Mr Nawbatt has not in terms sought
permission to withdraw his concession and I agree with Ms McCarthy that it is much
too late for him to do so. But in any event, the submission seems to me
misconceived. It implies that, by prescribing an on-line form which makes it
impossible to make the necessary adjustment to the self-assessment figure, the
Revenue can deprive a taxpayer of a relief to which he is lawfully entitled and to
which a claim has been clearly included on the face of his return. That cannot be
right. It may be, as Mr Dean seems to be saying, that it would have bypassed the
Revenue’s “automated tax consistency checks”. However, that is not the fault or the
concern of the taxpayer.
66. Whether the same would apply if the taxpayer had no such lawful entitlement
raises more difficult issues. As already noted (para 52 above), the Court of Appeal
proceeded on the basis that, even if the claim was made in error in that year, it would
still be part of the self-assessment. As Henderson LJ said:
“Plainly, errors of many different kinds may be made in such
an assessment, and they may include errors about the
availability of a relief. If the Revenue is dissatisfied with the
taxpayer’s self-assessment, its remedy is either to amend the
return or to open an enquiry into it under section 9A of TMA
1970 …” (para 57)
As he saw it, the Revenue’s difficulty was of their own making, in that they had
failed to take “the obvious step” of opening a timely enquiry into the 2010 Return,
so enabling them to challenge the repayment of tax claimed by Mr Derry at the same
time as pursuing enquiries into the claim itself and into his 2011 return (para 58).
67. Ms McCarthy in substance adopts the same reasoning. The fact that the
taxpayer’s self-assessment may be erroneous in some respect does not impact on the
procedural means available to the Revenue to challenge it. Mr Nawbatt on the other
side submits that, if the inclusion of the claim for that year was invalid in law, it
could not be relied on to create an immunity from challenge which would not
otherwise be available.
68. I am not satisfied that these issues have been fully explored in argument
before us, which has concentrated on the entitlement to relief rather than the means
of enforcement. As has been seen, there remain unresolved uncertainties as to the
correct interpretation of the entries in the on-line form and their treatment by the
Revenue. In addition, we heard little discussion of the relationship of the enquiries
Page 28
respectively under section 9A and Schedule 1A paragraph 5. Apart from timing, I
did not understand it to be suggested that there was any material difference between
the processes. While it may be prudent for the Revenue to institute an enquiry under
the former section, if there is any doubt about what is properly to be treated as part
of the return, it does not necessarily follow that the Revenue is thereafter bound by
the contents of the return for all purposes. If it later emerges that a claim was
wrongly included in the return for that year (for example, because it should have
been treated as subject to TMA Schedule 1B), it may at least be arguable that the
Revenue should not be precluded at that later stage from opening an enquiry on the
correct basis.
69. These are potentially important issues. Since we do not have to decide them
in the context of the present case, I would prefer to leave them open for further
consideration in an appropriate case with the benefit of full examination of the
relevant law and practice.
Conclusion
70. For the reasons given under Issue 1 I would dismiss the Revenue’s appeal,
and confirm the order of the Court of Appeal.
71. Finally, I repeat Lord Hodge’s concluding comment in Cotter:
“36 The revenue’s submission, which I have accepted, that
some entries in a tax return form are not part of the tax return
for the purposes of, among others, section 9 and 9A of the 1970
Act, may create avoidable uncertainty to taxpayers and their
advisers. But that uncertainty could be removed if the return
form which the revenue prescribes (section 113 the 1970 Act)
were to make clear which boxes requesting information were
not relevant to the calculation of tax due in the particular year
of assessment. In particular, the revenue could make this clear
where the form provides for the intimation of ‘stand-alone’
claims which relate to another tax year.”
We were not told what action, if any, has been taken in response to this advice. The
uncertainties revealed by the submissions in the present case have underlined its
importance. There is an urgent need for clarification, not only of the precise legal
status of the different parts of the return, but also of any relevant differences between
the paper and electronic versions of the return, and their practical consequences.
Page 29
LADY ARDEN:
72. I am most grateful to Lord Carnwath for his judgment. I agree that this appeal
should be dismissed as a result of Issue 1, subject to the observations on interpreting
consolidation statutes made below. But on the second issue I have respectfully
reached a different conclusion and so I will take that issue first.
73. In summary on Issue 2, I would provisionally express the view that in
consequence of this court’s decision in Revenue and Customs Comrs v Cotter [2013]
1 WLR 3514 and the evidence of Mr Graham Dean on behalf of HMRC, which Lord
Carnwath summarises at paras 57-58 above, the erroneous entry of a loss relief claim
which a taxpayer was not entitled to make in that year (not this case) in Box 15 of
the prescribed online tax return does not make that tax return form a “tax return” for
enquiry purposes. That (provisionally) means that in those circumstances HMRC
would be right to open an enquiry into the claim and not the return.
74. Because this appeal is principally about which enquiry HMRC must open, I
will take Issue 2 first.
Issue 2: would making an erroneous claim for relief in an online tax return
make that claim part of the tax return?
75. Issue 2 arises where a taxpayer has a claim for relief which relates to two
years and Taxes Management Act 1970 (“TMA”), Schedule 1B applies to it (“a year
2-related claim”). Under TMA, section 9(1) he must include in his return an
assessment of the amount for which he is liable to pay tax taking in to account any
relief or claim included in the return (see paras 22 and 64 above) (“the tax calculation
pages”). Suppose that the taxpayer submits a return online for the year and claims
in it relief for a loss which relates to the following year. His return will contain Box
15 (described by Lord Carnwath at para 43 above). Will his entry of a claim in Box
15 form part of that return for the purposes of the enquiry provisions of the TMA so
that if HMRC wish to open an enquiry into that claim for relief they must open an
enquiry into the return and not the claim? There needs to be a clear answer to this
question to avoid unnecessary service of numerous precautionary enquiry notices.
76. The relevant part of the tax calculation pages of the tax return is Box 1, which
set out the total tax due, and Boxes 13-15 and the narrative above all three boxes,
namely Boxes 13-15. Lord Carnwath has described Box 15 and that narrative in para
43 above. Box 13 is for “increase in tax due because of adjustments in an earlier
year” and Box 14 is for “decrease in tax due because of adjustments in an earlier
year.”
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77. HMRC has filed the evidence of Mr Dean. According to Mr Dean, once the
information in the tax return (apart from the tax calculation pages) has been
completed, the software “presents” a tax calculation from that information. Mr Dean
further explains that, when a claim is inserted into Box 15, the tax payable by the
individual and shown in Box 1 is unaffected. Using my own words, there is no
reconciliation or adjustment between Box 15 and Box 1: the figure for the tax due
for the year covered by the return remains exactly the same. What Box 15 on Mr
Dean’s evidence enables the taxpayer to do is to make an early claim for the relief
and to adjust his liability for tax for the following year in accordance with HMRC’s
understanding of the law.
78. There is a dispute between the parties as to the extent to which Mr Dean’s
evidence forms part of the evidence in these proceedings but the Upper Tribunal
noted that it was accepted by both parties save in relation to a point which is no
longer material (see [2016] STC 334, para 46). In those circumstances I propose to
deal with the issue on the basis of Mr Dean’s evidence, but on a provisional basis
only because this matter needs to be argued between HMRC and a taxpayer who is
interested to argue otherwise. I agree with Lord Carnwath that it is not open to
HMRC to argue that the online form prevented Mr Derry from making an adjustment
to his calculation of the tax due if that is what he is entitled to do. They can, however,
raise that argument against taxpayers with year-2 related claims.
79. It is pertinent here to note that HMRC must not simply prescribe a separate
form of tax return for use online – they must also prescribe “what constitutes an
electronic return”: see Taxes Management Act, section 8(1H), as amended by the
Finance Act 2007. This power is conferred by primary legislation and therefore
sections 9(1) and 8(1H) must be read harmoniously together. The form is in fact
available for use only through HMRC’s online services or with third party software
approved by HMRC. It seems reasonable to infer that the automatic calculations and
inhibitors on reconciliations built into the software and, it may be assumed, HMRC’s
online return form constitute part of the prescribed return and are included in what
constitutes the return, but this point has not been the subject of argument.
80. Again provisionally, there is no reason as it seems to me why the online form
should not preclude an adjustment which would produce a result which was
incompatible with the Taxes Acts. The objective in designing a tax return form,
including an online form, is to help the taxpayer file a tax return which properly
shows his liability, no more and no less. Indeed, Lord Hodge in Cotter specifically
envisaged that HMRC could take steps to prevent a taxpayer making claims in the
online form which he was not entitled to make: see para 24 set out by Lord Carnwath
at para 51 above.
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81. It is now necessary to go back to Cotter. As I see it, Cotter teaches us that
there is a difference, for the purposes of the TMA sections 8(1), 9, 9A and 42(11)(a)
at least, between a tax return and a tax return form. This may be seen from paras 25
and 36 of Lord Hodge’s judgment in Cotter, cited by Lord Carnwath at paras 51 and
52 above. This court there held that, if an item does not fall to be taken into account
for the purpose of calculating the tax payable by the taxpayer submitting the form,
it is to be left out of account and does not constitute part of the “return” for the
purposes mentioned. Mr Dean supplies the evidence as to how the relevant item in
this case (the entry in Box 15) is treated in the online form, and that is only to notify
HMRC of the claim and not to affect the tax payable.
82. The Court of Appeal reached the conclusion that the claim made by Mr Derry
was relevant to the calculation of the tax due (see para 47 above) but they took no
account of the Mr Dean’s evidence. However, if that evidence is accepted, it would
seem to me provisionally to follow that that their conclusion was wrong and that the
effect described by Lord Hodge in para 27 of Cotter (para 51 above) would apply
only in this case to a paper return in which the taxpayer performed his calculation
of tax due taking the claim into account. It follows that the Court of Appeal would
be in error in applying Lord Hodge’s reasoning to an online return (see per
Henderson LJ cited at para 52 above).
83. If that is correct, then as I see it (as I have said) provisionally, unless the ratio
in Cotter is to be in some way qualified for online tax return forms (which is not
suggested), the relief claimed through Box 15 would not form part of the statutory
“return” even if the true interpretation of Box 15 is that it is permitting an adjustment
to the tax. I do not consider that a taxpayer would necessarily have been misled by
this since he would see that his entry had no effect on the figure in Box 1. On that
basis, HMRC would not have to open an enquiry into the return where the taxpayer
had filled in Box 15 with an erroneous claim as opposed to an enquiry into the claim.
I would provisionally so hold for the reasons that I have given.
Issue 1: approach to interpretation of tax rewrite statutes
84. On Issue 1, while agreeing with all that Lord Carnwath has said, I add some
observations about the approach to interpretation of the ITA and consolidation
statutes in general to provide the context in which the passage from the judgment of
Sales J approved by this court should be applied.
85. In deciding how the court should interpret a statute, the type of statute as set
out in the statute’s preamble is a relevant consideration. In the case of the Income
Tax Act 2007 (“ITA”), the preamble provides that the Act is
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“to restate, with minor changes, certain enactments relating to
income tax; and for connected purposes.”
86. So, ITA is not a pure or “straight” consolidation Act. However, as the
Explanatory Notes cited by Lord Carnwath confirm, it is not (except for the minor
changes) intended to change the law. That is a matter which the courts must in my
judgment respect when interpreting the new legislation. In this regard it is of some
significance in interpreting consolidation statutes that they receive less
Parliamentary scrutiny than other primary legislation. The respect to which I have
referred for giving effect to Parliament’s intention where it is possible to do so is
often expressed in terms of a presumption, in relation to consolidating statutes, that
Parliament did not intend to change the law.
87. It would often be laborious for a court to investigate what provisions had been
consolidated in any particular provision of a consolidating statute. It would be wrong
in general for it to do so. The process of drafting a consolidation statute requires
specialist techniques and skills and can be very complex.
88. But the position is different in relation to prior case law. The restraint
required by the House of Lords in Farrell v Alexander [1977] AC 59 relates to
legislative history, and not to relevant antecedent case law. Moreover, in practice,
even where a statute is a consolidation statute, courts often look at previous case law
on provisions that are consolidated to assist them interpret the new provision where
there is any doubt or simply to confirm the view that they have formed. This is good
sense in the interest of the consistency of the law, the fulfilment of Parliament’s
presumed intention and the efficient use of judicial resources.
89. There is a further issue, yet to be resolved, as to the application of the doctrine
of precedent where there is a previous binding decision on the same provision in the
earlier enactment: see the discussion in Bentine v Bentine [2016] Ch 489.
90. Reference back to the earlier case law does not undo the good work done by
the consolidation, or run counter to it, since Parliament is likely to have had the
previous case law in mind in any event when enacting the consolidating statute
without any pre-consolidation amendment.
91. I agree that HMRC’s appeal should be dismissed.
